A U.S. congresswoman has introduced a bill to establish a secondary reserve fund for Fannie Mae and Freddie Mac. The bill, introduced by Rep. Marsha Blackburn (R-Tennessee), seeks to “amend the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to establish a secondary reserve fund for a housing enterprise under conservatorship to protect taxpayers against loss in the event of a housing downturn, and for other purposes."
The secondary reserve could also be referred to as an escrow account, where funds are held until a resolution is created on GSE reform. The bill would establish a secondary reserve by inserting the new language into the existing statutes.
“Any secondary reserve established under this Act for an enterprise shall not be considered capital, a capital reserve, or otherwise an asset of the enterprise, other than as part of a capital restoration plan for the enterprise approved under section 1369C, during the pendency of a conservatorship for the enterprise,” the bill said.
Fannie and Freddie have been sponsored by the government for several years. Since they were put under conservatorship after the housing crisis, the Federal Housing Finance Agency has been able to use the GSEs to modify millions of mortgages. When the GSEs began to become profitable the FHFA enacted a third amendment to their Senior Preferred Stock Purchase Agreement, which assigned all of their net worth gains to deficit reduction. This made Fannie and Freddie repay taxpayers with interest and the companies are operating with thin capital levels.
This bill could possibly eliminate conflicting interest between the Treasury and Congress on GSE reform. If Fannie and Freddie continue to keep putting all available capital into the Treasury for deficit reduction, there would be no mechanism to build up reserves against future losses. Establishing a capital reserve fund through this bill could protect taxpayers and provide capital to be used for the future of the housing finance system.